The reason why the issue of company
pension funds is being debated by the leaders of the main political parties in
the U.K. is, predominantly, because of the scandal that emanated from the collapse
of large British retailer British Home Stores last year. In Financial Regulation Matters, we have
already discussed this scandal from two perspectives: the first
post was concerned with the conduct of Sir Philip Green with regards to his
selling the retail icon to a less than stellar businessman, and his subsequent
pledge to ‘sort’ the crisis that emerged with regards to the £500 million
deficit in the company’s pension pot for its employees; the second
post analysed the proposal by Frank Field to incorporate corporate
governance standards aimed at public companies within the realm of private
companies in the U.K., which took the form of proposing that private companies
should abide by the Financial Reporting Council’s corporate governance code. So,
rather than go over those stories in any great detail again, we shall instead
focus upon the aims of the Prime Minister.

It is here that, in the style that
underpins every post here in Financial
Regulation Matters, it is important to look at things as they actually are,
not how we would like them to be. Whilst the BHS scandal highlighted the
incredibly transgressive nature of businessmen like Sir Green, the approach
taken by the state – whether that be via Parliamentary Committees, or
regulators – was particularly woeful. We saw, live, the utter disregard that
people like Green have for the state and the people who they harm on the way to
their successes. We saw how the Parliamentary Committees tasked with bringing
Green to account were bullied
and scolded by the billionaire. We saw how the establishment, with the
support of the media, heralded
the potential removal of Green’s knighthood as the best deterrent against
his conduct. We saw all this, and for this reason we should consider the
potential that these alterations to the companies laws in the U.K. will make
little difference when it comes to the most influential figures within the
arena of big business. If we add to this the understanding that the trajectory
of Brexit negotiations is likely to see the U.K. pandering to big business
in order to repair the damage that leaving the Union will create, then it
creates further uncertainty as to how, in any genuinely effectual manner, the
Government will rebuke those who they need to navigate what will be, almost undoubtedly,
particularly choppy waters in 2019. It is hoped that the Companies Act 2006 is amended to further protect the
pension pots of employees in companies in the U.K., but whether those
alterations will result in the next Philip Green being struck off from being a
company director is, arguably, highly unlikely. So yes, Mrs May, it is very
important, for the dignity of
employees, that their retirement funds are protected now – the question for the
British electorate is ‘is she true to her word?’

Thursday, 27 April 2017

Today’s post reacts to the news
that President Trump is seeking to ‘cut
corporate tax to 15%’ from the current rate of 35%. The proposal, which was
announced this week, represents what White House officials are labelling as the ‘largest
tax reform in US history’ and which has its basis in the (supposed) aim of
repatriating taxes on money that major US companies like Apple, Google, and
Microsoft generate abroad. For this post the focus will be on the larger
picture; specifically, the focus will be on the connection between this story
and the fears that Brexit will promote the idea that Britain will set itself up
as a tax-haven if it is shut out of the single market. The two developments,
potentially, point to a much larger issue that has been mentioned time and time
again here in Financial Regulation
Matters – the escalation in divisiveness within modern politics is playing
right into the hands of big business.

The loss in revenue to places like
Ireland and Luxembourg if Trump’s proposals come to fruition will see those
countries aggressively attempt to undercut the US. The U.K., if it decides to
proceed down the path of reducing corporate tax to the lowest of any G20
country, will then be forced to follow suit, and so on and so on. Whilst there
is a lot up in the air in this area at the moment, one thing is certain –
playing this game of bending over backwards to corporate elites that only have
their interests at heart will result
in catastrophe. Whilst business cannot be regulated in every single thing that
they do within this current society, it is remarkable that, just a decade on
from one of the largest financial crashes in history, amnesia has recommenced
and the corporate elites who threatened the very fabric of society are now
being courted to save it. Yet, it is not remarkable. It is, if we take a step
back for a moment, actually very ordinary. The cyclical elements to these
stories are clear, yet the smallest details are being hashed out by officials
and the media – the larger picture shows, unfortunately, that the bubble that
these deregulatory and tax-reducing moves will create will pop with an almighty
bang; the question is, and it is a question that should concern us all, ‘will
the reverberations of that explosion be too close to the last one?’

Tuesday, 25 April 2017

Today’s post looks at the news that
Conservative MP and Chairman of the Treasury Select Committee, Andrew Tyrie, is
to step down at the forthcoming election. Rather than cast aspersions on Tyrie’s
political allegiances, the focus for this post will be, primarily, upon his
role as Chairman of the Committee. In this role, Tyrie has developed a
reputation for being meticulous and thorough when scrutinising the actions of
political and business elites, and it is this that is important for our
understanding. Therefore, after looking at Tyrie’s performance over the years
in the role, the post will look at where Tyrie should go now that he is leaving
Parliament, and also the importance of finding a suitable replacement.

The caveat to this piece is that it
should be a given that politicians could always do more in their roles.
Scrutiny is great but, just for one example, the fact that hardly anybody was
punished for the Financial Crisis and the endemic fraud that underpinned it is
the more telling understanding. However, we have spoken
before in Financial Regulation
Matters about the limitations of advancing the notion that white-collar
criminals should be punished just as severely as anybody else, so with that in
mind let us continue within the parameters that scrutinising is a particularly positive
endeavour. In that sense, Andrew Tyrie represents the forefront of political
and business-related scrutineering in this country, akin, arguably, to recently
retired US Senator Carl Levin who, apart from his many endeavours over his
years as Senator, led the inquisition
into the Financial Crisis from an American perspective. Tyrie has been in
and around Parliament for over 20 years, and took the reins of the Treasury
Select Committee in 2010. In that role, which
he campaigned to have strengthened by making the case for Select Committee
Chairman to be elected by MPs, Tyrie has faced off against a number of
powerful and influential individuals. In 2016, the Select Committee called Sir
John Chilcot to bear, with Tyrie
putting Chilcot under particularly revealing pressure with his thoughts on
Tony Blair’s culpability in taking the country to war. He has grilled Governors
of the Bank of England, including a systematic
examination of Sir Mervyn King’s powers, and more recently rebuking Mark
Carney for threatening the perceived independence of the Bank by engaging in a ‘deliberate
attempt to frighten the voting public with a political motive’ regarding
Brexit. His economics background gives him an insight into a world which often,
and purposefully, shrouded in an air of complexity – this was demonstrated particularly
well in his public dressing-down of former HBOS Chairman Lord Stevenson, who
Tyrie labelled ‘delusional’,
living in ‘cloud cuckoo land’, and as being ‘evasive, repetitive, and
unrealistic’. The most recent example of Tyrie’s quest for fairness amongst the
financial elite was reviewed in Financial
Regulation Matters when the story broke that Charlotte
Hogg had transgressed in her role in the Bank of England; again, it was the
Committee behind that development. However, Tyrie would also make a name for
himself for challenging the elites within his own party, which has seen him
being described, since he announced his resignation, as a ‘true
parliamentarian’.

Tyrie’s most famous political
clashes have been with the leaders of his own party, including none other than
the then Prime Minster David Cameron, and the then Chancellor of the Exchequer
George Osborne, who has graced
the pages of Financial Regulation
Matters before. With regards to the David Cameron, the two had a heated
exchange during a hearing whereby the Prime Minister was being questioned on
his approach to assisting inquiries into the relevancy and appropriateness of
force being used in Syria, which saw Cameron angrily respond to Tyrie ‘you
do not know what you are talking about’ after being asked why information
was not forthcoming to Intelligence and Security Committees tasked with
overseeing the actions of Government. With regards to Osborne, the then
Chancellor was taken to task regarding a bank surcharge that the Government had
dreamed up because, essentially, the fear was that the surcharge would inhibit
competition to the detriment of consumers and small businesses. These are
just some of the many actions taken by Tyrie in his role as Chairman of the
Select Committee, but as of the General Election in June, the Committee will
need a new leader.

This then raises two questions. The
first is where will Tyrie go now? It was stated in the Financial Times today that Tyrie’s decision came as a surprise
initially, because ‘only
last week he was lobbying to stay chair of the committee’, although it
appears that he was aware that the tenure may have only lasted one more year. At
60, Tyrie still has a while to remain influential, and one columnist in The Guardian has suggested that Tyrie
would be a natural
replacement for Hogg, or at least should be given a prominent role in the
Bank of England – this is not the worst idea in the world. Failing that, a role
within a financial regulator like the Financial Conduct Authority would seem
fitting for a man who challenged political elites at the cost of his
parliamentary career; hopefully, this story does not end in the same way most
political careers do with the politician monetising their position by walking
through the ‘revolving door’. In terms of the second question – who will
replace Tyrie? – there are currently no stand-out characters. What is for sure,
however, is that what we need – in terms of a country going through a
particularly difficult and divisive transition – is someone who will forego
political ambitions (in terms of wanting to become a cabinet minister) in order
to hold the political and financial elite to account. There is a constant fear,
demonstrated by the posts in Financial
Regulation Matters, but across the news media generally, that the changing
tides in the British political landscape can be fertile ground for abuse – a select
committee chairman who will be willing to ask difficult questions may be the
best chance, within the current parameters, of reducing the likelihood of that
abuse. Therefore, the appointment to the Chairmanship should be observed with
interest.

Monday, 24 April 2017

Today’s post focuses upon the upcoming
raft of company disclosures in the U.K. that will detail the differences
between what Men and Women are paid. The first companies to reveal their
internal statistics include Virgin Money, Schroders, and Utilities company SSE,
with the headline figure being that one of the companies, Virgin Money, has pay
gaps of an extraordinary 36%, which is roughly twice the national average.
In this post, then, we will look at the disclosures that are forthcoming and
assess whether the actual task of forcing companies to reveal the gender
pay-gaps is even something we should be insisting upon, or whether there is more to be
done on a much bigger scale – there is clearly much that needs to be done, but
the question remains of how it should
be done to eradicate the pay-gap once and for all.

Virgin Money’s ‘People Director’
Matt Elliot is quoted as saying that as the firm had too few women in senior
roles, with men making up 67% of the highest paid positions as opposed to just
26% of the lowest-paid, there is a need ‘to
make consumer-service roles more attractive to men’. SSE found that 34% of
men in its company received a bonus, compared to just 12% of women, and when
paid the bonuses were, on average, 32% larger for men. As for the issues of
bonus rates, it is hard to justify such a chasm – the fact that the firm chose
to blame a gender gap in science and technology education is telling. With
regards to Elliot’s comment, it seems almost remarkable to suggest that the way
the company should deal with a lack of female representation is to encourage
men to take lower paying jobs, rather than anything to do with the firm’s
recruitment procedures. On this point, the CBI raises a point in which it
states, via a report by a partner at law firm CMS, ‘if
employers are not responsible for all the problems, they cannot be held
accountable for all the solutions’, adding that more affordable child care
and better education for women would bring women’s pay in line with men. Whilst
it does remove the burden from business, it does raise an interesting point
regarding the systematic assistance in this area, which a columnist in The Telegraph agrees with then they
state that ‘childcare in London can easily cost £25,000 per year. For all but
the super-rich, this is simply unworkable’, which is capsulated by the headline
‘the
gender pay gap is about motherhood. Everything else is just noise’. The
role of the government, therefore, can be seen as crucial in this area.

Ultimately, the answer has to be ‘no’
on both accounts. Firstly, the sentiment does not go even nearly far enough
because it focuses on the difference between men and women; what about the
divergence between women, if we focus on women just for one moment, from
different backgrounds? Does that not matter? Research
recently found that the difference between Pakistani and Bangladeshi women
and white women was 26%, whilst black African women earned only 80% as much as
their white male counterparts, with the divergence between a disabled woman and
non-disabled woman being 22%. These factors, and the official ignorance, or
perhaps denial, of them means that the pro-market sentiment is particularly inappropriate.
Yes, businesses need to do an awful lot more, but urging women to act with their
custom is hardly an effective method of changing this socially-ingrained problem.
The fact that 82% of firms, based upon a survey of 145 employers, were not even
reviewing their pay practices in light of the new regulation, speaks volumes.
The pro-market stance of the current government is clear to see, and it is
continuing to affect our societal values. Businesses are at once being put
under pressure to perform ‘for the good of the economy’, but also being tasked
with altering deep-rooted social norms. The government, who are elected to take
such action, are claiming that business should do it. The result? The result is
simple – the buck is being passed. Women are not being supported by the state
to compete at the upper echelons of the workplace, and are not being supported
by the institutions that they work for; obviously something needs to change but
the question is who will initiate that change and carry the torch for this
societal need? According to the above, it is women who will have to do it by
being conscientious with where they spend their money; that statement is
indicative of a dire state of affairs in this supposedly ‘modern’ society.

Saturday, 22 April 2017

Today’s post was intended to move
away from the world of politics after a number of posts in Financial Regulation Matters focused upon the actions of the
political leaders in the U.K. However, politics and financial regulation, and
business matters moreover, are intrinsically intertwined. Therefore, today’s
post will remain in this juncture between the relevant fields and look at the
recent news that the British Government is about to sell
the Green Investment Bank (GIB) to a consortium led by the Australian-based
Macquarie Group. So, in this post, we will take a look at the GIB in more
detail and see whether the claims from the government that the deal represents
good value for the taxpayer really hold true under scrutiny.

The Green Investment Bank, which
proudly proclaims on its website to be ‘first bank of its type in
the world’, was created in 2012 after consultations stemming from the 2010
General Election. In 2012 the bank received
the authorisation from the European Commission to receive state aid and
subsequently became a fully-fledged financial institution. The bank, which
currently has only one shareholder – the U.K. Government – has a capitalisation
of nearly £4 billion that was designed to allow it to invest in ‘green’
endeavours up and down the country, ranging from wind farms to bio-waste
processing plants. In 2015, the Government decided that it would sell a
majority stake in the bank, stating that the move would give the bank ‘more
freedom to borrow, remove state aid restrictions, and allow it to attract more
capital’ and this week a bid was accepted, preliminarily, to that end. The
bid of £2.3 billion, which comes from a consortium led by the Australian-based
Macquarie group but, also interestingly for British academics, contains the
Universities Superannuation Scheme (USS), sees what would be, potentially, Britain’s
fastest-ever privatisation create a £160 million profit for the public
purse which one onlookers suggests ‘we
can’t grumble about’. However, there have been a number of questions raised
about the proposed sale.

The Government, ultimately, are
spinning this move as a clear indicator of the potential of Theresa May’s
Conservative Government in light of the forthcoming General Election, but it is
worth noting that the Conservative Government were eager to offload the bank as
soon as possible anyway, in order to relieve the books as the bank
stood as a liability for the Government. The purpose of these posts is not
to lambaste only the Conservative Government because, in essence, all political
parties have an awful lot to answer for. However, the Conservatives are
currently in power and, as such, will receive the majority of criticism (I’m
sure they do not lose sleep over it). With that in mind, the headline that the
Green Investment Bank has created a £160 million surplus is rightly being kept
off the business pages, with the actual headlines being that the Government are
privatising an entity, faster than they ever have before, which is helping to
fund green projects in this country. Not only that, but the entity they are
selling to are renowned corporate players and, as such, are raising huge
concerns as to the appropriateness of them taking over. The attachment of the
USS was probably supposed to bring authority to the move, but the recent
actions of the USS raise further concerns. Ultimately, the £160 million will be
worthless if the group strip the assets of the GIB, and even more so will look
like a rip-off if, as expected, the firm reduce the amount of investment once
the news cycle moves along. The speed of this privatisation is arguably the
most remarkable element to this story however, with only 5 years from start to
finish representing a clear move by the Government to signal its intentions –
the country’s assets are available to the highest and most preferable bidder.

Wednesday, 19 April 2017

Today’s short and reactionary post
is concerned with a recent statement made by the Chancellor of the Exchequer,
Philip Hammond, in which he told the British taxpayer, and essentially every
citizen, that ‘we
have to live in the real world’ with regards to the news that the U.K.
Government may be ‘forced’ to sell its stake in RBS at a loss. The troubled
bank, which the Government pumped £45 billion of taxpayer money into in the
wake of the Financial Crisis, has reported nine consecutive annual losses since it
was bailed-out and only recently posted a massive £6 billion loss, as
was discussed in Financial Regulation
Matters, in addition to the looming threat of a massive fine from the U.S.
Department of Justice, which some
suggest may be as high as $12 billion. So, in this post, we will follow
Hammond’s advice and ‘live in the real world’ – by assessing his performance
and stance, as well as the situation in this ever-changing and increasingly fractious
post-2016 world. For once, Philip Hammond is right – it is time to live in the
real world.

Philip Hammond, the man who
recently made the garish statement for us to live in the real world, is the son
of a civil engineer and a University of Oxford graduate, attending the
University at the same time as Prime Minister Theresa May did. He has had a
number of high profile endeavours in the business world, although
one in particular left creditors severely out of pocket. After graduating
from the University of Oxford, and making his multi-million pound fortune in
Construction, Hammond was elected as MP in 1997 for Runnymede and Weybridge,
and steadily made his way up through the ranks of the Conservative Party –
although he maintained his interest in his construction firm via an offshore
trust that the Cabinet Office has ruled does not
represent a conflict of interest. In relation to this, Hammond gave a wife
a stake in the business in order to reduce his tax expenditure, a fact which
one onlooker finds ironic that the ‘man who
has spent years working out how to most efficiently use the tax rules is now in
charge of crafting them. “He’s a poacher turned gamekeeper”’. Recently, in
his role as Chancellor, Hammond has been making waves for reasons which have a
distinct societal importance. Firstly, Hammond was exposed to an incredible
amount of criticism over his decision increase tax rates on the self-employed,
which saw
him almost immediately back down. Then, only a few days ago, it was stated
in The Independent that Hammond is
facing calls from his own party to backtrack on a four-year
freeze that his party placed upon working-age benefits, as the cap is now
set to hit almost 50% more claimants than he had originally envisaged. So,
taking Hammond’s advice and living in the real world, it seems only right to
conclude that he is not just a Chancellor of the Exchequer, but a
multi-millionaire from a privileged background who has conducted such an attack
on the poor of this country that even Conservative Party members are urging him
to relent – yes, the real world indeed.

In terms of RBS, the situation
could not be clearer. The bank, which sought to defraud investors with
despicable practices – investors, like pension funds and their members, that
make up many of the electorate that will go the polls in June – will likely be
returned to the marketplace after causing the taxpayer to suffer an incredible
loss. Removing ourselves from economic thought processes for just one moment,
the taxpayer bailed out a private company that had transgressed against them to the tune of £45 billion,
and now will not see the entirety of that money back and the bank will be free
to transgress again, safe in the knowledge that it will be rescued. The loss, which has already topped £1 billion and
will no doubt run into the many billions, comes at a time when we are told that
the NHS services in nearly
two-thirds of the country are being cut back, which a report
in the Journal of the Royal Society of Medicine recently blamed for causing
30,000 deaths in 2015 alone. According to a report
conducted on behalf of the Office of National Statistics, the U.K. has nearly 4
million people living in persistent
poverty – 16%
of the United Kingdom is classified in this manner. In addition to these
relative and incredibly distressing statistics, the Government, in responding
to the rapid increase in mental health issues affecting British citizens, has
cut up to £598 million from the relative budgets each year and this year added insult to injury by affording
just £15 million for ‘crisis cafes’.
These are just some, of the many
instances of what the ‘real world’ looks like so, yes, it is time to live in
it.

Ultimately, Mr Hammond’s call
should be exactly what is needed. The country goes to the polls in June after,
presumably, being subjected to a campaign trail that will focus on Brexit, not
hospital cuts. It will focus on ‘needing
unity’, and not how the most vulnerable in society have not only been
dismissed, but are actually seeing their positions attacked and the funding
that is supposed to help them extracted to cover the multi-billion pound support
that successive governments have
afforded to big business and the elite in society. This author urges anyone to
actually listen to Prime Minister’s Question Time (as the Prime Minister will not be making any other
public appearances on Television) and ask whether anyone has answers to
these pressing problems. In reality, Hammond alluded to a ‘real world’ in which
we must live, but, in truth, many of the country’s citizens do live in the real world and it looks nothing like the life that Mr Hammond
returns to every evening.

Tuesday, 18 April 2017

Today’s post could only have been
concerned with one news story and that is the news that Theresa May, the
British Prime Minister, has called for a General
Election to be held on June 8th. For this post, as always, the focus will
be looking at the longer vision. We have already
looked at the options and the future facing Theresa May in light of the British
electorate’s decision last year, particularly with reference to the business
arena that may result, and today’s announcement contributes to this future, but
in a way that may not be so obvious at first glance. In a slight departure to
usual practice, today’s post will start by looking at the politics of the
decision, but will then assess the trajectory of recent events in relation to
what it means for the relationship between society and big business.

To begin with, it is being taken as
read that the Conservative Government will have its wish of initiating a
general election granted, because first the House of Commons must agree to the wavering
of the restrictions imposed by the Fixed Term
Parliaments Act 2011, which sought to enforce a 5-year term for any
Parliament; Labour Leader Jeremy Corbyn and Liberal Democrat Leader Tim Farron’s
almost immediate announcements that they will be embracing
the challenge seems to provide the early indication that the Government
will waive the restrictions imposed by the Act in the morning. Once the
election path begins, officially, there is likely to be an awful lot of
accusations, claims, and counter-claims that the British public will have to be
subjected to in what is a third major election in three years – following the
General Election two years ago, and the E.U. membership referendum last summer.
As for the election itself, the outcome is likely to be relatively straightforward – ignoring
the general failings of polling companies in the past few years – as the
Conservatives hold an incredibly
large lead over the Labour party at the time of writing, something which
Scottish National Party leader and First Minister of Scotland Nicola Sturgeon
suggested was indicative of the ‘selfish, narrow, party
political interests’ that she believes embody the May Premiership. Whilst
the debate will no doubt run and run over the next seven weeks – mostly about
Brexit but hopefully about the state of the NHS, Job Security, and Public
Spending, to name but a few extremely important issues that were rarely mentioned
today – Theresa May’s speech on the steps of Number 10 Downing Street presented
a much more important and menacing political issue.

This talk of division and
uncertainty is supposed to garner unity to serve the ‘national interest’, but
in actual fact it will do the exact opposite. One of the first
posts in Financial Regulation Matters
discussed the delicate situation facing Theresa May post-referendum, and rather
than navigate the choppy waters with delicacy she has, as one onlooker stated,
thrown a ‘huge
cluster grenade of political risk, uncertainty, and potential volatility’ into
a situation that required the very opposite. Her consistent declarations that
she would not
call for snap election, as it would cause ‘instability’ have now been
proven to be untrue. So, what does this mean for society in its seemingly
constant battle against big business? One thing that it certainly does is give
the upper hand, even more than usual, to big business that is, almost on a
daily basis, threatening to leave the U.K. post-Brexit if it is not given
preferential treatment as we have already
discussed in a previous post. This morning’s development contributed to
that uncertainty and division in a way which was actually damaging to the ‘national
interest’ because, if we look through a longer lens, we will see that the U.K.
is in real danger of having to bow to big business, which very rarely ends
well.

It is important not to get lost in
focusing upon one’s political outlook and short-term issues, because even
though this post has chosen to criticise the Conservatives, it is also the case
that the main opposition, the Labour Party, are a shambles and offer no real
opposition at all – hence May gambling on securing her mandate in the face of
such weak opposition. The question is not how will the U.K. government navigate
Brexit, but should actually be what state will the country be in 10 or 20 years’
time. It has been mentioned in this blog on a number of occasions that what is
required is a conscious and consistent effort to restrain big business so that
society is not regarded as some sort of piñata that can endlessly be beaten –
today there was not even an inkling that this was on the minds of the leaders
of the political parties in the U.K. Instead, we saw continuous back-biting,
infighting, and political slurs that all sought to draw attention away from the
fact that the poor and vulnerable in this country have had their positions
attacked, continuously, whilst the futures of big business is being prioritised
by the political leaders. The focus on Brexit and political divisions in
interviews today, and not on financial
exclusion, an increase
in societal deprivation including mental health, physical illness, and
suicide rates, increasing
inequality, and a sharp
reduction in spending on fundamental values in this country like the National
Health Service was disheartening – yes, it was paid lip service, but it is not
enough. What we need now is unity, but not in terms of all following one party’s
vision, but in uniting against real issues that are a blight on our society; it
is worth asking ourselves if we believe that today’s events, and the future it
created, aided or hampered that aim.

Monday, 17 April 2017

Today’s post is concerned with the
issue of banks closing their physical branches up and down the U.K., which has
recently led the Shadow Chancellor John McDonnell and other politicians to call
for an end to what is being described as an ‘epidemic’ of bank branch closures –
McDonnell has pledged that Labour will tackle the issue by only permitting
branches to be closed only after extensive
consultation and the gaining of permission from the Financial Conduct Authority,
should they win the next General Election. However, this post will examine the
issue from the obvious point of the need to keep branches open, but also from
the point of view of whether it is right, or indeed appropriate to force
private companies to operate in a manner which benefits the public but not
their own profit margins.

The obvious issue is in relation to
the availability of banking services, and crucially of financial advice, to
people who are deemed to be ‘vulnerable’ i.e. the elderly or the financially uninformed.
This takes us back to an important
post in Financial Regulation Matters
were we discussed how the Government are apparently embarking upon a push to
increase the amount of financial education within society, as demonstrated by
the establishment of the ‘Financial Exclusion Committee’. In line with the
ethos of the Financial Exclusion Committee, the ‘Campaign for Community
Banking Services’ has noted that the issues of access to financial
services, sustainability of communities, and environmental damage (through
increased travel to branches further afield) are all knock-on effects of the
increased rate of branch closures. In essence, we have a governmental push to
increase financial literacy and support at the same time that the most visible
source of that support is being withdrawn, which is the main source of
criticism from onlookers. However, what of the arguments of the banks in
radically changing the culture of the country and its communities?

The issue of what is expected of
the banks can be neatly categorised by the economic and regulatory studies of
so-called ‘public goods’. ‘Public Goods’, in the economic sense, are ‘things’
that are provided for the public, and contain certain characteristics.
Essentially, a ‘pure’ public good has both ‘nonrival’ and ‘nonexludable’
properties, meaning that the good can be consumed by one person without
reducing the availability of potential consumption by another (nonrival) and
that the good is free to all (nonexcludable). The study of this phenomenon can
be found in the field usually termed as ‘Public Choice’, but for our purposes
an interesting discussion can be found in this
interesting blog post by June Sekera. However, the term is often (and in
this author’s opinion misguidedly) used interchangeably, alluding to a
provision of a service as contributing positively to society (a better term could
be used for this). Banking, on both
sides of the Atlantic, is often
perceived to be a ‘public good’, and this can be demonstrated by the consistent
references to providing for a community. Yet, what we expect of a private, or
indeed public company, is often alluded to, and herein lies the issue. Banks, particularly
under Right-wing governments, are considered to be purely private institutions
whose affairs the state cannot interfere, unless some illegal transgression has
been committed. McDonnell, in representing the Left-wing, confirms that the
Labour Government would actively interfere in the organisational procedures of
private institutions, which is not particularly surprising knowing what we know
about the main political parties. However, there has been little discussion as
to why the state should interfere, or
not, it has just been assumed that one’s political outlook will decide one’s
views. There is, however, another way of assessing the situation.

In the early 2000s, the leading
banks took conscious efforts to defraud investors, engage in a systemic
degeneration of ethics and standards, and ultimately put society at great risk,
all because of one widely-held understanding – they were too-big-to-fail.
Companies such as RBS in the U.K., and Bank of America in the U.S., understood
that whatever happened, the state could
not let them all fail. We know
now that this was understood, and ‘too-big-to-fail’ has made it into common
parlance as a result. Therefore, rather than the societally-dangerous reasons
underpinning the Right-wing viewpoint of leaving business alone, absolutely,
and the Left-wing approach of interfering in private business, it is better to
understand it in these simple terms: relying on the public as a parachute intrinsically makes that company liable
to consider the public more than companies that do not. The work of the
Financial Exclusion Committee has confirmed that there is a desperate need to
increase financial education and face-to-face support, and as such the leading
banks, particularly those that have directly benefited from the public fisc, must take an active role in meeting this
required demand. Whether that means reducing the rate of branch closures can be
debated, but there must be an effort to meet that demand – it is not enough,
like RBS have done (a major beneficiary of public bail outs) to simply claim
statistics as the reason for increased closures. Banks do not fulfil the
requirements of the ‘public good’ designation on a number of accounts, but like
the Financial Crisis seemingly changed the parameters in favour of the banks,
it can now be brought back around to favour the most vulnerable in society. It
is important that political bias does not interfere with this alteration, but
that we simply adhere to the notion that everything has a price that must be
paid – interest payments on bailouts are not enough for irrevocably changing
the parameters of society.

Sunday, 16 April 2017

Today’s post looks at a subject
that has been the focus for many of the posts in Financial Regulation Matters and that is Executive Pay. In
recognition of the ever-increasing issue of executive pay despite poor
performance, the blog has analysed a number of issues in this field, ranging
from BP
recently cutting the pay packet of its CEO to Credit
Suisse vowing to increase the bonuses it pays to its leading managers.
However, as discussed in a post
dating back to the 9th of February, there is an undercurrent of
unrest amongst shareholders that is slowly but surely beginning to shape the
atmosphere amongst big business. In this post, the focus will be on reviewing the
latest tranche of stories coming from the world of big business in relation to
executive pay and, ultimately, the post will discuss how the trajectory of this
movement to affect the pay packages of some of the leading business figures may continue.

The first firm that will be worth
discussing is Bunzl, the multinational non-food
product distributor that is headquartered in London. The company made headlines
last year because it decided to pay its former CEO, Michael Roney, a full
year’s bonus package despite the fact that he had only worked a proportion
of the year before leaving. In receiving a total package of £3.64 million,
having only worked up until April of 2016, Roney drew the anger of shareholders
as over 26% of the shareholder body voted against the pay package award. In
reaction to the revolt, the company instituted a pro-rata system of pay
packages, which have ultimately been welcomed by shareholders, although recent
news that new CEO Frank van Zanten is to have the maximum bonus he can receive boosted
to 180% of his £800,000 annual salary has prompted another wave of activism.
Shareholder groups ISS and Pirc have stated recently that the remuneration
policy, with regards to van Zanten, is ‘not
without concern’ and is to be considered as ‘excessive’. The coming days
should reveal the reaction to the latest round of activism within Bunzl, but
the company is currently sticking to the oft repeated line of ‘the
remuneration policy is intended to drive and reward performance’. ISS, an
influential proxy advisor, have been busy recently. In addition to criticising
Bunzl, the shareholder advisory service recently criticised the energy giant
Drax regarding its decision to increase
the pay of its CEO, Dorothy Thompson, to £1.6 million, despite the company
recently announcing that shareholder dividends would be facing an overhaul. The
energy company, which is currently experiencing a difficult period owing to the
challenging conditions facing all energy companies, reacted by stating that it
had consulted with the majority of shareholders before initiating the rise, but
in actual fact nearly 23% of shareholders have voted against the hike, which
should see the company backtrack or make the necessary changes to quell the
uprising within its ranks.

In a similar story related to the
reaction to activism from shareholders (and in this case politicians), Credit
Suisse who, as
we know, were adamant that their top bosses would receive an increased pay
package, have recently relented. However, rather than an official response to
the activism, it is actually the bosses themselves have acted to see their
packages reduced in the face of criticism. Tidjane Thiam, along with other top
managers at the bank, have recently agreed to a 40% cut
in their packages after an extraordinarily fierce response to their
proposed $77 million increase, as was discussed previously in Financial Regulation Matters. Thiam, in
writing to the shareholders of the bank, announced that the board had
volunteered for the cut after shareholders has expressed ‘reservations’ about
the increase, ultimately conceding that the recent and massive settlement between
the bank and the US Department of Justice was ‘not
appropriately reflected in the compensation of the current management’
which, in layman’s terms, means the board had been of the opinion that no one
would question why they were being rewarding for being at the helm during one
of the worst periods in the bank’s history. This development is yet another
demonstration of both the power of shareholder activism, and also the
incredible levels of detachment from their actions that some CEOs demonstrate.

Another story, but one that is
ongoing at the time of writing, is the move by customers of the embattled
airline company United Airlines
to limit the pay package of its CEO, Oscar Munoz, by way of a procedure
initiated by United Airlines that sees its CEO’s pay package linked to consumer
satisfaction. In reaction to the video
that recently went viral of a Doctor being forcibly and aggressively removed
from one of their airplanes, customers are reportedly ready to react
negatively in consumer surveys which would see Munoz’s pay package reduced
by $500,000, although this is unlikely to make a dent in Munoz’s reported $14.3
million pay package. However, the negative press is likely to continue for some
time, so there is a likelihood that his pay package may be reduced even
further, particularly if the share prices of the airline continue to fall in
the wake of the PR disaster.

In terms of companies responding to
pressure over executive pay, it is worth ending this section with news that BT,
the massive telecoms company, is reportedly about to claw back some of the £5.4
million earned by its CEO Gavin Patterson last year because of the scandal that
emanated from the ‘inappropriate
management behaviour’ in its Italian division which ultimately wiped over
£8 billion from its market value – essentially, the division had been
overstating its performance for years. As a result, BT’s bosses were being
rewarded for meeting performance measures which were based upon fabrications,
and as such it is now likely that its top bosses will have to pay back some of
their bonuses linked to these performance measures. It is, however, likely that
this will not be the end of the story for the bosses at BT, as the scandal
looks set to further unravel, as is the way with accounting scandals (think of Enron, although that
was on a much bigger scale, of course).

Ultimately, the stories that
continue to garner headlines represent a developing sentiment. Yes shareholders
are becoming more active in disputing the pay packages of their managers, but
the coverage of this activism is, unfortunately, not absolute. The stories of
BlackRock, G4S, and the recent decision by ISS to reverse
its criticism of a pay procedure for bosses at Goldman Sachs mean that
shareholders, as a general body, have much more to do to restrain the actions
of their managers. Yet, this is the problem. Ultimately, shareholders of
companies are exactly that, shareholders in that
particular company. They do not, for obvious reasons, represent a unified
body with concerns outside of their own advancement. The sentiment being
developed by the headlines that shareholders represent a positive check on mismanagement
is correct, but potentially misleading. It is misleading because it advances a
mentality that shareholders should be the protectors against mismanagement when,
in reality, it is the state’s responsibility. Shareholders cannot, and arguably
should not, be placed as vanguards for protecting the public because, simply,
that is not their role. The current political climate, which is dominated by
the political ‘Right’, has cultivated this sentiment and we are now seeing the
theoretical support for that movement. This is not to champion the political ‘Left’
– far from it – but there must be a responsibility taken by the state to act in
the interest of the public. In this regard, we must understand these
shareholder-champion headlines from within that framework.

Saturday, 15 April 2017

This short post is based upon a
forthcoming article by this author that examines the viability of the latest
entrant into the credit rating arena, the Analytical Credit Rating Agency
(ACRA). The article, which is due to be published in the European Company Law
Journal (and is available here in
a pre-published version), looks at the chances of the ACRA succeeding when
viewed within the parameters of perception,
an aspect that underpins the credit rating sector. For this post, the focus
will be upon introducing the ACRA, and then on examining the effect it may have
upon the wider political issues affecting the Russian Federation.

The Analytical Credit Rating Agency
was established in November 2015
and comprises of 27 major Russian companies and financial institutions that
serve as its shareholders. The agency, which became the first rating agency to receive
accreditation from the Russian Central Bank
under the new N 222-FZ Law
which was designed to protect investors, has a relatively small operating
capital of 3 billion roubles, or around £42 million. Nevertheless, the agency
has a defined code of
conduct, and aims to embody its key
principles of independence, prevention of conflicts of interests, timely
disclosures, and increased compliance procedures. Whilst these aspects are to
be expected of any new entrant to the credit rating market place, the ACRA aims
to make clear that its dedication to these principles separate it from its
competitors. However, whilst the official line seems perfectly normal, there
are other issues that some suspect may hamper any gains the agency may make.

Under the new laws drafted by the
Russian Central Bank, rating agencies operating in Russia are to be subjected
to an increasing amount of intervention and regulation. For example, the new
law gives the central bank the ability to supervise any agency acting in its
jurisdiction on a daily basis,
and also allows it to actively intervene in the composition of its board and
management structure. As such, and in a much anticipated move, the leading
rating agencies have reacted negatively to these developments and have
ultimately withdrawn from the Russian market, with Moody’s
and Fitch both closing their Moscow operations and withdrawing their
ratings for Russian debt (Standard & Poor’s is in discussion with the
Central Bank about how it may maintain its presence but not be subjected to the
new law). With the ACRA being the first agency to be successfully granted accreditation
under the new regulations, it may seem obvious to state that the situation
looks rosy for the new agency. However, the knock on effects could be disastrous.
The situation started with Russia’s annexation of Crimea, which ultimately led
to sanctions from the U.S. against the Country and many of its leading business
figures. As such, the leading rating agencies, all American of course,
subsequently could not provide ratings for the businesses of these connected
figures and, as Deputy Finance Minister Alexey Moiseev recently stated ‘we
didn’t have any idea of those banks’ credit quality’. With the ACRA, there
is now an organisation that will supply ratings for these connected
institutions, but the interconnectedness between Vladimir Putin and business in
Russia has led many to proclaim that the ACRA is simply ‘Putin’s
rating agency’, a claim which has been vociferously
denied by ACRA’s CEO Ekaterina Trofimova. Whilst there is no evidence of
Putin’s connection to the new firm, the perceived
connection is arguably more than enough to keep the suggestion going.

Ultimately, the ACRA is a response
to global-political issues that see Russia needing to fend for itself. The recent
downgrading of Russian debt to ‘junk’
status, and also the ‘indefinite’
sanctions levied against the country in the wake of the annexation of Crimea,
mean that Russia is, potentially, being cast adrift in terms of its position
within the global marketplace. The recent escalation
in tension between the U.S. and Russia seems to be indicative of sentiment
that is based upon fragmentation and division, and the ACRA arguably represents
the realisation of this sentiment within the corridors of the Kremlin. Whilst
the move to create a nationally-focused rating agency makes sense for Putin in
the current eco-political climate, it will perhaps hasten the seemingly
inevitable situation whereby Russian debt becomes too risky for the global
capital markets to hold. This process has already begun with the appropriation
of the ‘junk’ status by the largest rating agencies, but Putin’s insistence on
not bowing to their evaluations means that the chances of Russia returning to
the global table, in terms of debt issuances, are more remote than ever before.
Whilst this author has written a number of pieces suggesting that we, as a
global society, need to move away from the Big Three’s ratings, there is an
argument that would say now is not the time for Russia to be withdrawing ever
further away from the global capital marketplace. The global economy would be
much better served with an outward-looking Russia, but the recent establishment
and cementation of the ACRA suggests that an inward-looking Russia is the one
that we shall bear witness to in the near future, and perhaps even further into
the future – the effects of this may be extreme in a number of possible
circumstances.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.